Yahoo's not-so-awful quarter

July 22, 2008: 8:59 PM ET

By Yi-Wyn Yen

Yahoo's quarterly earnings weren't as bad as everyone thought.

After both Google (GOOG) and Microsoft (MSFT) last week reported weakness in the online ad sector, investors feared the Internet portal would be in far worse shape. Yahoo's second quarter profits slid 19% to $131 million and its earnings per share fell a penny short of Wall Street's estimates of 11 cents, excluding one-time charges. But company executives remain confident that the company will reach its projected revenue outlook of $7.4-$7.9 billion for the year. Second quarter revenues came in at $1.8 billion, a 6% gain from a year ago.

Analysts expected very little of Yahoo (YHOO) and kept the bar so low that they were somewhat surprised when Yahoo delivered its results Tuesday. "There's been a lot of turmoil at Yahoo," said Global Crown Capital analyst Martin Pyykkonen. "The general sentiment was that [Yahoo] would bleed to death.... They reported roughly in line, so this was better than expected."

It's been a rough quarter for Yahoo. The company battled with Microsoft and activist Carl Icahn, faced angry shareholders, and went through a major reorganization as a number of high-profile executives headed for the exits.

Given a sluggish economy, Yahoo president Sue Decker said she was encouraged by the gains the company was making in the search market, an 11% increase in searches from the same period last year. The latest comScore figures show that Yahoo has made slight gains in search queries in the last three months after declining for four straight months since December. "We're very cognizant of that fact," Decker said on an earnings call with investors.

Yahoo's incremental improvements in search combined with its tepid profit performance neither help nor hurt the company. "This is just another another quarter of slugging it through," said Jefferies analyst Youssef Squali. "It doesn't push Yahoo to tell Microsoft, 'We're glad we didn't take your offer and we deserve a higher multiple.' At the same time, Microsoft can't come in and say, 'Well your numbers have decelerated so rapidly so we're going to pick you up on a song.'"

During the hour-long call, Yahoo CEO Jerry Yang stressed that the company was all about "maximizing shareholder value" and repeated that mantra several times. But analysts say they'll believe it when it happens. Yahoo's shares gained nearly 3% in after-hours trading Tuesday, to $21.99. That's still well below the $33 per share that Microsoft had offered in May.

Yahoo fended off an unsolicited takeover by Microsoft and made peace with Icahn on Monday by awarding him three seats on an expanded 11-member board.

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